Why Mortgage Costs Could Rise in 2014

Mortgage costs for borrowers without big down payments and with less-than-perfect credit scores are set to rise next spring.

Fannie Mae and Freddie Mac, the mortgage-finance companies that currently dominate the mortgage market, are boosting the fees that they charge lenders. Lenders, in turn, tend to pass those higher costs onto borrowers in the form of higher mortgage rates.

In an update posted to its website on Monday night, Fannie showed just how much more certain borrowers could pay after the fee hikes take effect next spring.

For instance, for a 30-year mortgage, a borrower with a credit score of 735 making a 10% down payment will pay fees totaling 2% of the loan amount, up from 0.75% right now. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to 850.) An upfront fee of 2.5% can raise the mortgage rate by around 0.5 percentage points over the life of the loan.

For borrowers making a 10% down payment with credit scores of 750, fees will increase to 1.5% from 0.5%; and for those loans with a borrower credit score of 775, the upfront fee will rise to 1% from 0.5%.

Borrowers with larger down payments could also see higher fees. For borrower with a credit score of 690 and a 25% down payment, fees will rise to 2.25% of the loan amount, from 1.5%.

Fannie and Freddie have been working with their regulator, the Federal Housing Finance Agency, on the changes. Even though Fannie and Freddie have become enormously profitable, the regulator has said that the companies should raise fees in order to make non-government-backed lending more competitive, particularly for riskier loans. Spokesmen for both companies declined to comment.

A senior FHFA official said Tuesday that even with the latest changes, Fannie and Freddie will be charging less than what the regulator believes a private investor would require to meet a traditional rate of return. The FHFA last week announced the fee increases but didn’t provide specific breakouts for different borrowers. In a report, it provided additional analysis around why it believes the fee increases are needed.

Housing analysts said a combination of higher fees, rising interest rates and new mortgage regulations could further constrain mortgage credit next year. “It’s another headwind for housing on top of other headwinds that, individually, might have been manageable,” said Ivy Zelman, chief executive of Zelman & Associates, a housing research and advisory firm.

In recent months, some large banks have been offering “jumbo” mortgages—which are too large for government backing—at rates below conforming mortgages. The higher fees contribute to the inversion of that spread between jumbos and conforming loans.